The positive correlation between core Eurozone 10 year sovereign bond yields and the euro is still strong. The continued decline in the yields suggests that the rally on the euro will be short-lived and should be used as a chance to sell.
Last week leading European Central Bank council member Benoit Coeure suggested that the ECB would be front loading the summer QE purchases due to fears that markets would be illiquid and they may not be able to meet the monthly targets. This suggests that there will be added pressure on the euro in the coming months. However there has since been a rebound as reports have suggested that a deal is close to completion between Greece and its creditors. If this is to be the case then the final tranche of €7.2bn of bailout funds would be released and Greece would be able to meet its repayment obligations in June (it owes c. €1.6bn to the IMF in June which begins with a €300m payment on Friday 5th).
There is a relief rally underway on the euro. However it is unlikely to be long before we see the downside pressure on the euro resume. There is a strong correlation between sovereign yields and the movement on EUR/USD since the turn of the year and the ECB engaged QE. Yields on the German 10 year Bund the French 10 Year OAT are threatening to break below their key reaction lows at 0.520% and 0.819% respectively. However this is happening as the euro is just started to trade higher. The charts below show how closely the euro has traded with yields on the 10 year French and German bonds in 2015.
There has been a rally on the euro since yesterday, however on a technical basis there is some significant resistance overhead in a band of around 100 pips between $1.0960/$1.1065. I expect that if there is a deal announced between Greece and its creditors, there will be sn extension of this relief rally. However despite teh relief of the Eurozone avoiding an immediate “Grexit” I would still see this rally as a chance to sell. I expect this 100 pip band of resistance would be an area where the buyers would run out of steam. There is a technical downside target of around $1.0660 from the breakdown below $1.1065.
I see that with bond yields falling away again, this is another reason behind why the euro rally is unlikely to go too far. Already today we are beginning to see the bulls lose impetus (as the prospect of an immediate deal for Greece has been played down by the European Commission. however a deal needs to be met by 5th June and I expect this to be seen next week. This could induce the rally back into the $1.0960/$1.1065 area that i see as an “ideal sell zone”.